International
Giannis Papanikos / AP
Greece faces an ultimatum as it prepares to vote Sunday on a referendum that will determine its future in the eurozone: Accept creditor nation demands of harsh austerity or reject the mandatory cuts and risk leaving the bloc — a scenario that could lead to a 40 percent drop in purchasing power for Greek citizens.
The ability of the troika — the International Monetary Fund, the European Commission and the European Central Bank — to force Greece into making this kind of decision relies, in part, on its belief that other, once fragile member states such as Italy, Portugal and Spain are now more financially stable, according to experts.
In 2011, the last time Greece nearly defaulted, Athens' debt crisis caused market panic as speculation drove up yields on Italian, Portuguese and Spanish bonds, and many experts predicted the breakup of the eurozone.
This time, creditors appear less afraid of Greek contagion.
Since 2011, the European Union has installed safety mechanisms such as the European Stability Mechanism, a firewall that dispenses loans to member states to prevent crises. The EU has repeatedly vowed to intervene when needed.
“The euro area is in a much better shape today than it was some time ago,” an EU official said on condition of anonymity as per department policy. “We are monitoring the situation and, if necessary, stand ready to provide assistance with measures to avoid any potential risks of adverse effects on financial stability in these countries.”
With Greece on the brink of a euro exit, the spread on bonds in Spain, Italy and Portugal has remained relatively stable. The markets are betting that a Greek euro exit would not “lead to a full-fledged unraveling,” Neil Irwin of the New York Times wrote Monday.
The risk of contagion appears minimal, said Ricardo Reis, an economist at Columbia University. “No one has made a run for the banks.”
Spain, Portugal and Italy — where the economic output is still about 9 percent below precrisis levels — appear so far to be largely unaffected by the Greek crisis.
“That was an important part of why the European authorities felt more confident or not completely scared about the possibility that maybe Greece would leave,” Reis said.
Greece's ruling Syriza party has been remiss in continually repudiating creditors' demands for reform, Reis said. Greece threatened in February to leave the eurozone — and drag down neighboring economies with it — if it was not granted a debt reduction and a reprieve from austerity.
“This is where they lost the poker game in the past two months,” he said. The troika appeared to believe that this time, it could afford to call Syriza’s bluff.
Still, if Greeks vote against the EU proposal on Sunday and ultimately abandon the eurozone, leaving the bloc will no longer be considered impossible for others too, Reis warned. This, he said, could change the calculus of EU member governments and investors in the future, driving up bond spreads in the other Southern European countries.
“Once it becomes clear that the euro is no longer irreversible,” he added, “people will speculate that it can happen."
With Reuters
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